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Guild's Guide to Healthcare in the Age of Covid-19
05/25/2020 5:00 am EST
The COVID crisis is first and foremost a healthcare crisis, although it is having deep economic effects, asserts money manager Monty Guild, editor of Guild Investment Management.
Predictably, in the market volatility caused by the pandemic, the healthcare sector has broadly outperformed; and within healthcare, biotechnology has performed even more strongly.
Of course, healthcare is a broad sector, comprising many sub-sectors and industries. Not all companies in this sector are frontline contributors to addressing the pandemic; many will be badly hurt by the economic contraction and falling revenues that are challenging world markets.
Among these may be companies whose prospects will rapidly recover as the public health situation continues to stabilize and move towards normalization; for example, some medical technology companies whose products are primarily used in elective procedures.
When the recovery is underway, these may snap back, but the uncertainty about the timeline for medical progress is keeping investors somewhat cautious.
Therefore it’s worth pointing out the segments of the healthcare sector that are likely to see tangible benefit from the support they are able to give to virus-fighting efforts, and will therefore likely continue to outperform the broad market even in the event of further volatility.
Broadly, the healthcare response to the virus falls into two broad categories: diagnostics and therapeutics. Within diagnostics, there are molecular and serological tests; within therapeutics, there are antivirals and vaccine development. We’ll touch on each of these four areas.
Molecular diagnostics test for the presence of the virus; serological diagnostics test for the presence of antibodies.
In essence, the former tells you if you currently have coronavirus; the latter tells you if you had it in the past. Getting molecular testing online was the first pressing order of business for public health officials, and it’s still not at full strength.
The FDA made test validation and approval standards more lenient in order to get more tests in public health officials’ hands, but there are still bottlenecks due to imperfect tests, insufficient lab capacity to process tests, and insufficient human capital (lab technicians able to perform analysis).
Serological testing is more scientifically challenging, but will also become more crucial as the public health battle proceeds into a longer-term phase and authorities try to get a more data-driven understanding of the prevalence of virus exposure in the broader population — which will help in getting a real understanding of the disease’s overall mortality and the risks posed to particular demographic groups.
In serological testing, the main participants are Becton Dickinson (BDX), Chembio Diagnostics (CEMI), and again RHHBY and ABT. CEMI, interestingly, per press reports, has an FDA-approved 15-minute point-of-care serological test.
As far as antiviral therapeutics go, some are pipeline assets with no current approvals; others are off-label uses of already approved drugs for non-COVID indications.
Promising new pipeline drugs are also being evaluated, some with accelerated approval timelines. The most publicized — which may have achieved emergency FDA approval by the time you read this — is remdesivir, produced by Gilead (GILD).
VIR Biotechnology (VIR) is partnered on several clinical-stage molecules with Alnylam Pharmaceuticals (ALNY), Biogen (BIIB), and GlaxoSmithKline (GSK). Eli Lilly (LLY) is developing a pneumonia treatment targeted at COVID patients.
Several companies with platform approaches are leveraging those platforms to identify promising molecules on which to initiate trials — for example, Adaptive Biotechnologies (ADPT) in collaboration with Amgen (AMGN).
On the vaccine front, the first-to-clinic was Moderna Therapeutics (MRNA), leveraging its messenger RNA platform to develop a vaccine with a novel mode of action. (Several of the other vaccine candidates mentioned below also use an mRNA approach.)
Other entrants in the race for a vaccine include Johnson & Johnson (JNJ), VIR, SNY (alone and in collaboration with Translate Bio (TBIO) and GlaxoSmithKline (GSK), Pfizer (PFE), Inovio Pharmaceuticals (INO), and Novavax (NVAX). Again, besides those companies that have identified an actual candidate, there are many others scouring their platforms to identify something that could be advanced.
Needless to say, our cataloging of the various diagnostic and therapeutic entrants does not imply a positive opinion of their prospects, or view that their shares are attractive for investment at current levels.
We are simply pointing out the healthcare segments of immediate coronavirus relevance and the main companies that are addressing them.
Other Relevant Healthcare Segments
Besides companies working on diagnostics and therapeutics, we are most interested in companies at the intersection of healthcare and technology.
That may include healthcare IT companies such as Cerner Corporation (CERN), Livongo (LVGO), and Teladoc (TDOC), as well as cloud-based software-as-a-service providers that target their offerings particularly at healthcare enterprise customers, such as Veeva Systems (VEEV).
Obviously many of the Silicon Valley giants, such as Alphabet (GOOG) and Apple (AAPL) have products and (in GOOG’s case) whole research divisions focused on tech and healthcare. To us, that is one more reason to be bullish on big tech’s ultimate prospects.
If the pandemic galvanizes a political drive for more robust spending on healthcare research and development, large contract research organizations (CROs) such as IQVIA Holdings (IQV) and firms that offer them support may also benefit. The same caveat given above applies to these companies.
And finally, it is likely that the political conversation surrounding healthcare will shift dramatically if the public moves from anger to gratitude as their baseline orientation to the industry — particularly to those companies who are the public face of medical salvation, such as the larger biopharmaceutical firms.
Here, we are most interested in companies with deep pipelines and healthy balance sheets. Ongoing volatility may afford them the opportunity to acquire pipeline assets at a discount, and we do not foresee a future in which the public will lose its desire to see progress on the long-term front of the battle against the perennial enemies such as cancer, heart disease, and dementia.
The thematic relevance of novel therapeutics for these conditions will certainly survive the current pandemic and its economic wake.
The measures taken to combat the pandemic have been unprecedented, as have their effects on many economies around the world. However, the response of governments and central banks has also been unprecedented. Thus, markets are in the midst of a tug-of-war.
The expectation of many market veterans has been for further volatility and a retest or break of the March lows, but some are quietly mitigating their pessimistic views, and calling for a shallower retest, or a volatile sideways period before markets begin to price in global economic normalization and a return to growth.
We believe that the totality of available evidence suggests strongly that the public health issue will be solved in the not-too-distant future, and that while there will be long-term shifts in consumer and business behavior, a general normalcy is appearing on the horizon.
If the fourth quarter of this year does mark the beginning of that normalcy, markets may already be starting to price it now. Of course this does not mean that there can’t be unexpected setbacks as the situation stabilizes.
These considerations lead us to suggest that investors who are too cautious at this juncture may ultimately regret their posture. There are reasons for optimism as well as for concern — risk to the upside, and not just to the downside.
We continue to focus our attention on specific areas of healthcare, technology, e-commerce, as well as certain consumer-oriented companies with resiliency to current business conditions.
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